Long Term Care Annuities
To shield yourself and your loved ones from the increasing costs of long term care, you should consider planning ahead with a long term care annuity. Expensive insurance bills can lead to financial risk and instability during retirement in the future. Thus, a long term care annuity acts as an alternative way to pay for these expenses and reduce the burden of nursing home costs.
In this article, we discuss what a long term care annuity is and how it can operate. Furthermore, we discuss the key stakeholders that benefit from long term care insurance and the next steps you can take in getting the best policy.
About Long Term Care (LTC)
Long term care (LTC) encompasses a wide set of services that are designed to address a person’s needs related to personal care or health. These provide a balance of independence and security for older adults who have difficulties carrying out daily processes on their own. LTC is especially important for people who have physical and cognitive conditions as a result of an accident or illness.
Long term care usually involves services such as meals and transportation services. It is usually offered in various areas by various caregivers, personalized to meet the needs of a specific individual. Some might benefit from in-home care provided by unpaid friends and family members. Others might opt for a nursing home or a community facility, such as a daycare center for the elderly.
Different Types of Long Term Care
Long term care is generally divided into two types: personal care and skilled care.
Personal care, also known as custodial care, is the most common type of long term care. This option assists with ADLs (activities of daily living). The six basic types of ADLs are bathing, grooming, using the toilet, moving around, dressing, and eating.
On the other hand, skilled care is specifically designed for medical conditions needing assistance from medical professionals such as registered therapists or nurses. This care option is usually meticulously planned and is required by seniors 24 hours a day. While this is usually provided in a qualified healthcare facility, services such as Home Health Care allow professional medical care, such as wound treatment and medical supervision, to be given directly at home.
What is Long Term Care Insurance?
Long term care insurance is specifically designed to reimburse LTC costs for nursing home care, home health care, and adult daycare for people aged 65 and above or those with disabling conditions. LTC insurance is generally more flexible than other similar public assistance programs, including Medicaid. While Medicaid usually does not cover expenses for assisted living facilities and in-home care, LTC insurance does. Many policies offer full home coverage for a live-in caregiver for up to seven days a week, 24 hours per day (depending on the policy benefit).
Experts suggest investing in LTC insurance as a component of a comprehensive retirement plan between 45 and 55 years old. This alleviates the stress caused by high costs of extended healthcare. Furthermore, LTC insurance is cheaper when bought at a younger age. However, it is important to weigh your options and assess whether paying for coverage over a span of years is manageable in your current situation.
Is LTC Insurance Necessary? How Much Does it Cost?
Long term care insurance is crucial in reducing financial expenses related to health, which can be very high. In a 2021 Cost of Care Survey carried out by Genworth, a private room generally costs $297 per day, or about $108,000 per year. While semi-private rooms are less expensive, they can still be a long term burden — they have a median cost of $260 per day, which amounts to approximately $95,000 in annual costs.
Furthermore, according to Genworth, for assisted living communities, the median cost is $148 per day, equivalent to $54,000 a year. Average prices are steadily increasing over time, as evident by national data collected within the last 10 years.
What is a Long Term Care Annuity & How Does it Work?
Essentially, a long term care annuity is a hybrid annuity or a deferred fixed annuity geared to assist in long term care payments without compromising funds set aside for retirement. Deferred fixed annuities provide a stable interest rate over a set period of time without taxes on earnings until they are withdrawn as income. This removes exposure to market risk, hereby securing your principal.
A long term care annuity can help pay for nursing facilities, terminal illness bills, home healthcare, and nursing facilities. This annuity includes a long term care rider, which is an add-on that provides additional features and benefits.
To start receiving benefits, you will have to meet certain medical criteria that justify paying for long term care. These include a diagnosis of a chronic illness such as Alzheimer’s disease, which needs round-the-clock care.
Who Needs a Long Term Care Annuity?
The federal Administration for Community Living reports that most Americans turning 65 will need long term care services at some point in life. This need can be exacerbated by several factors. Age is one of these significant factors — the older a person is, the more likely that long term care is needed. Gender can also play a large role. Women usually outlive men (approximately five years on average), so they likely need more long term care.
Furthermore, chronic conditions and disabilities can increase your chances of needing long term care. You will also likely need it if you are living alone compared to if you have a spouse or partner.
How These Alternatives to Traditional Insurance Can Double or Triple Your Investment Without Tax
Purchasing a long term care annuity can increase your initial premium payment by 200% or 300% to create a tax-free LTC insurance benefit. Furthermore, payments are tax-free by virtue of the Pension Protection Act. However, payments towards long term care expenses are only accessible via reimbursement, according to the Internal Revenue Service (IRS). Therefore, you can be taxed if you withdraw funds for reasons aside from LTC.
As an example, investing $40,000 in a long term care annuity will allow your insurance company to declare that you are “standard” status, and so your investment would be equivalent to $80,000 of LTC services. If you are designated as having a “preferred” status, your investment is tripled to $120,000, but this is only to be spent on LTC facilities.
To use the annuity, you will need to choose a qualified service or facility. Afterward, you can access the monthly benefit via reimbursement, which involves paying costs out-of-pocket and transmitting invoices to your insurance company. Furthermore, designated beneficiaries will inherit the value of the entire annuity policy as an accumulated sum upon the death of the owner.
Who Pays for Long Term Care Expenses?
Generally, the costs of long term care are paid using out-of-pocket funds — these include personal savings accounts and investments. Some individuals even choose to place their homes and assets for sale on the market to pay for their medical needs.
You can also fund a long term care annuity by repositioning assets or annuities you already own. Some individuals employ a tax-free 1035 exchange from an existing annuity to a new long term care annuity. Others choose to make payments via their IRA or funds from savings, life insurance, and bank CDs.
For those who qualify, Medicaid can pay for approximately half of the cost of nursing services. This government-funded program reimburses impoverished individuals for nursing fees, but retirees needing long term care cannot usually take advantage of Medicaid. Seniors must meet federal and state regulations for income and assets, and this means that only the legally poor can leverage the benefits of Medicaid.
On the other hand, Medicare and Medigap (supplement insurance for Medicare) do not usually cover long term care. Medicare only covers skilled nursing facilities, and it does not pay for homemaker services and in-home skilled care. Furthermore, while Medigap can reimburse hospital bills and excess physician fees, it does not include long term care nor does it cover custodial care or assisted living facilities.
Long Term Care Annuity vs Long Term Care Insurance
Traditional long term care insurance can also be a medium for investing in long term care. These policies are specifically geared toward LTC, much like a long term care annuity, but they usually do not possess a substantial growth component. Furthermore, if you do not qualify for LTC, you cannot receive the premiums you invested in unless you spend funds for a return of premium rider. A long term care annuity still allows annuitized payments even without utilizing the benefits of a long term care rider.
Requirements for Purchasing a Long Term Care Annuity
You must meet several medical underwriting requirements before you can benefit from a long term care annuity. First, you must request an LTC insurance quote and submit an application. For a long term care annuity, this application generally comprises a medical background check and a phone interview.
Insurance components tend to look for certain criteria when assessing the need for LTC. The primary requirement involves a person being unable to meet two out of the six ADLs. Some policies also require certifications from doctors that LTC is really necessary, and others cover “cognitive impairment” if coverage is received before diagnosis.
Most policies also do not provide benefits on the first day of using home care. Generally, companies set elimination periods of up to more than 30 days, determined using calendar days. Thus, LTC benefits would take longer and would require more out-of-pocket expenses if services are used only part-time.
What Will My Beneficiaries Obtain?
A long term care annuity can be accompanied by death benefits. If you purchase an annuity, you essentially are entitled to the income. Therefore, you can protect your money by passing the funds down to your heirs, much like any other type of property. Whichever is greater between the minimum guaranteed surrender value or the accumulation value of the annuity will be inherited by your beneficiaries.
Next Steps: Should I Invest in a Long Term Care Annuity? What Are the Overall Pros and Cons?
All in all, you must consider your financial circumstances and personal goals before investing in an LTC policy. You need to consider the pros and cons of a long term care annuity over other options, like traditional insurance policies or Medicaid.
On one hand, a long term care annuity can be bought with a single purchase payment without additional increases in the future. Other annuity and life insurance policies are also easily repurposable using 1035 exchanges, and a long term care annuity generally has more seamless health underwriting than traditional policies. Furthermore, tax-free withdrawals make a long term care annuity a great investment.
However, these benefits can turn into disadvantages depending on the circumstances. The large up-front premium payment may not be a suitable option for you. Moreover, the value of your annuity may be reduced upon receiving long term care benefits, which would provide little to no assistance for your beneficiaries.
With this, you need to check factors like your age, health status, retirement objectives, and assets before finalizing a decision. If you can afford a long term care annuity upfront, this can be a great investment. But, if you are younger and generally in good health, traditional insurance policies or life insurance might be a better fit. Speak with a financial advisor regarding your choices to prepare for future costs. These qualified professionals can help you choose the best coverage for attaining your goals.